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Is your business model fit for the Fourth Industrial
Revolution?
weforum.org
/agenda/2019/01/is-your-business-model-fit-for-the-fourth-industrial-revolution
All aspects of Amazon’s business, such as its acquisition of Whole Foods, support each other.
Image: REUTERS/Carlo Allegri
This article is part of the
World Economic Forum Annual Meeting
As the Fourth Industrial Revolution becomes ever more pervasive, we have good and bad
news for leaders of incumbent businesses in all sectors and all geographies.
We spent a large part of last year analysing the performance of the business models of the
world’s leading companies. By “business model” we mean the overall,
interdependent system
by which an organization creates value for customers and captures value for itself. This
includes its propositions, products, resources, processes, revenue streams and cost
structures.
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The bad news first: there is an urgent need to transform traditional business models. The
good news: there are ways of slicing up this seemingly elephantine task into bite-sized
chunks.
In this article we provide a 10-point checklist for doing so, including one action that is
proving particularly effective in fast-tracking the necessary change.
Let’s look at the bad news from our research in more detail:
⦁
Fewer than 10% of companies’ business models are economically viable as the world
digitalises. Private surveys of CEOs confirm this sentiment.
⦁
The most successful business model today
– in terms of customer value, revenue growth
rates and market valuation – is the digital platform business model.
Seventy percent of the
world’s top 10 most valuable companies
(Amazon, Apple, Alibaba, Microsoft et al) and 70%
of the $1 billion+ “Unicorn” startups (Didi, Airbnb et al) operate this model,
yet fewer than
2% of other companies do.
⦁
Digital platform business models
are forecast to mediate up to 30% of global economic
activity by 2030, yet
fewer than 5% of traditional companies
have a coherent platform
strategy that is integrated with their corporate strategy
.
⦁
On average,
fewer than 10% of the board members
of incumbent organizations fully
understand the economics of digital platform business models.
⦁
Incumbents in all sectors are investing more and more in digital – to keep up with
customer demand and increased competition (not least from platform players) – but
fewer
than 15% of those companies are seeing any financial return
at all on their digital
investments
. Internal innovation efforts, hackathons, accelerators and incubators are not
proving successful enough in improving performance today.
⦁
As a result, the vast majority of leaders today lack confidence that their organizations are
ready to harness the changes associated with the Fourth Industrial Revolution.
Clearly, the imperative to transform incumbent business models and be able to compete
effectively in a hyperconnected world has never been stronger. But transforming what is an
interdependent system of people, processes and technologies, a complex mix of tangible and
intangible assets that have been optimized to serve customers and deliver returns to
shareholders in a certain way over many years is not easy.
The good news is that there are 10 steps that leaders can take. None of them is easy, but we
have found that the last one helps fast-track the achievement of the others.
The 10 point checklist for a business model fit for the Fourth Industrial
Revolution
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1. Do your Board and Executive Team fully understand the economics of digital platform
business models?
Many leaders today don’t know what they don’t know. Digital platforms are a relatively new
phenomenon and few have experience of operating them. If platforms are likely to mediate
30% of global economic activity by 2030, everyone should understand how they operate so
they can be clearer how to copy, compete or collaborate with them. It’s time to rapidly and
thoroughly re-educate all leaders. Few organizations have done so.
2. Do you have a bold platform strategy in place, integrated into your corporate and digital
strategy?
Once leaders understand the new opportunities and threats, they can properly include
platform thinking into their corporate growth strategy. This will require careful engagement
of and communication with shareholders. Five years ago, Chinese company PingAn said it
was no longer an insurance company, it was a “technology company with financial services
licenses”. It executed on a platform strategy and is now worth considerably more than its
erstwhile competitors.
3. Have you reallocated at least 10% of your capital and resources to platform business
models?
Time to put your money where your mouth is and properly invest in business models that
deliver better value for all stakeholders. Today, most companies have tinkered with digital
experiments and arms-length investments. Capital reallocation is the best way of turning
strategy into reality.
Wal-Mart recently made bold moves to compete by investing heavily in acquiring platform
businesses Jet.com and Flipkart. Naspers, a 100-year-old South African publisher, invested
$33 million in platform business Tencent, a stake worth over $100 billion today. Based on
this experience, it then invested in creating and operating its own digital platform businesses,
worth far more than its traditional publishing operations.
4. Have you created a synergistic portfolio of old and new business models?
Amazon became so powerful by redesigning its whole business “system” with platform
thinking. All aspects of its business support and reinforce each other. Buying Whole Foods
not only created a new way of deepening relationships with certain consumers, it also created
a new, internal customer for Amazon’s Web Services division (AWS). AWS’s Internet of
Things marketplace drives innovations for its smart home device business, which drives
demand for its e-commerce services.
5. Have you re-conceived your company’s purpose for the 4IR?
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Platform business models enable organizations to serve customers without having to invest
in traditional assets; they focus on facilitating high value interactions between multiple
parties (Airbnb owns no property, Facebook develops no content, developers create apps for
Apple). This changes the potential scope of what an organization can achieve, and the speed.
Are you a “manufacturer of medical equipment”, or is your purpose to cure cancer by
orchestrating an ecosystem of actors to do so? Uber’s purpose is to “move people from A to
B”. It competes with car manufacturers but makes no cars.
6. Are your leaders open to cannibalizing parts of your core business?
Enabling third parties to serve your customers is often counterintuitive for businesses.
Schibsted, a Norwegian media company, invested heavily in online marketplaces which
seemingly would cannibalize its traditional classifieds business. Instead it helped them create
a new digital business, on a global scale, worth far more than their previously local and asset-
heavy business model. Steve Jobs was originally against allowing others to create apps for the
iPhone. If he had prevailed Apple would not have become the world’s most valuable
company.
7. Does your organization have pervasive competence in software, data, AI?
In his new book
Smart Business
, Ming Zeng, the Chief Strategy Officer of Alibaba, describes
how the company invests heavily in optimizing all activity with software, data and machine
learning: using algorithms to optimize every exchange, replicating human decision-making
with software, and letting data flow inside and outside the organization via APIs and
standards. The aim is for most operational decisions to be made by machines, so the
company can adapt more rapidly to market demand. Skills in these areas are in short supply
today of course, but the returns are significant if you can attract them.
8. Have you created new metrics to guide your business?
Often company metrics are short-term and backward looking. They focus on measuring the
success of the dominant existing business model but not on enabling new business models.
Digital platforms often take three years to take shape, five years to get traction, and eight
years to achieve critical mass. Traditional CFOs (and shareholders) are not used to the
success drivers of powerful digital business models like these, so understanding the new
types of metrics is critical.
9. Do you have a truly “ambidextrous organization” in place: with different units focused
on “optimizing the legacy” and “inventing the future”, holding equal power and status?
Building on the last point, it takes a long time to transform a legacy business model, due to
cultural barriers, entrenched organizational structures and, of course, existing metrics. Few
organizations have leaders with the combination of vision, digital expertise and personal
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power of Jeff Bezos to drive fundamental change down from the top within an incumbent
business. Best practice today is not to try to fight against natural human resistance to change.
Better to bypass it.
While the core business is being optimized, invest in a separate business unit with the power
to invent the future with new business models, new metrics, new people. Crucially it must
report directly to the CEO and not be trapped within an “innovation unit” inside the legacy
organization. It needs oxygen, resources and power to breathe and succeed.
10. Are you leveraging proven tech entrepreneurs to build new digital ventures in areas
that are strategically relevant to your business?
And finally, a step which shouldn’t really be last – it can and should be implemented first, in
parallel with the others. If the definition of innovation is the process of taking ideas from
inception to impact, and the impact you are looking for is 10x rather than 10%, then the
method we have found most successful in catalyzing this level of value creation and
transformation for a traditional corporate is to
partner with proven tech entrepreneurs
within a joint venture (JV) vehicle to rapidly grab new market opportunities.
Entrepreneurs are unlikely to want to work directly for an incumbent corporate, but they
value their assets (customers, cash, IP, networks). So, incentivized by an equity-based JV
structure, entrepreneurs can leverage these assets to rapidly grab new, strategically relevant
market opportunities before others do.
If the vehicle is designed effectively, in a way that reduces corporate risk and enables a level
of control, it becomes a win-win-win: for the corporate (to mitigate disruption and transfer
knowledge), its shareholders (to generate new value) and for the growing network of
successful tech entrepreneurs looking for their next opportunity (without having to deal with
rapacious VCs).
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.
Written by
Simon Torrance
,
Managing Director, FoundersLane
Felix Staeritz
,
Founding Partner and CEO, FoundersLane
The views expressed in this article are those of the author alone and not the World Economic
Forum.
